Phony Promises

This note was originally published at 8am on February 24, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

"It's the easiest thing in the world to make phony election-year promises about lower gas prices."

-Barack Obama

Markets don’t lie; politicians do. With the US Dollar getting pulverized to fresh YTD lows yesterday ($78.82 US Dollar Index), the price of oil ripped to new YTD highs.

The President of the United States said nothing about gasoline’s immediate-term -0.8 correlation to the US Dollar – he blamed “the Middle East and Wall Street Speculators.”

Storytelling can be sad.

Back to the Global Macro Grind

This whole “clean energy” rant appeals to people. My office is on an Ivy League college campus – trust me, I get it. What I clearly don’t get is how both Bush and Obama’s economic “advisors” concluded that the best long-term path to economic prosperity is through currency devaluation. Both Carter and Nixon tried this. So did Charles de Gaulle. It doesn’t work.

You know, there are no quick fixes to this problem.” –Obama (in Miami yesterday)

Really? There actually is a quick fix. And since our central planners love those, you’d think they’d at least be forced to debate it. A Strong Dollar Policy – in both MONETARY and FISCAL action = down oil, hard.

I know the Energy “experts” disagree, and that’s fine – all the more reason to try the one policy idea neither Bush nor Obama tried. Give one of these “experts” some inside info that Ben Bernanke is going to come out with a “surprise rate hike” on Sunday night, and you’ll see more Oil men buy puts than a Congresswoman from the 112th.

I wrote about this yesterday and had a proactively predictable responses from partisan people. The minute you credit Reagan for anything, the Democrats cringe. The second you compliment Clinton on anything fiscally conservative, the Republicans whine.

Only inside the Bubble in American Politics could partisanship make us all feel so willfully blind…

Back to the data: look at the long-term chart of Oil vs the US Dollar. It doesn’t lie. 

  1. US Dollar Index > $90 = bearish for Oil
  2. US Dollar Index < $90 = bullish for Oil 

Again, during the 1980s and 1990s, not only did the price of oil routinely trade in the $18-22/barrel range (using long-term decade averages here folks, not Iraqi points on the cart), markets EXPECTED it to. 

  1. 1983-1989 = average price of oil (WTI) = $22.16/barrel
  2. 1993-1999 = average price of oil (WTI) = $18.63/barrel 

*note, I use 1983 and 1993 to take out the 1981-82 and 1991-92 US recessions, which, ostensibly, would be your “low demand” years - if you’re asking a run-of-the-mill supply/demand Keynesian, that is…

Expectations drive markets. Period. And the entire world expects Ben Bernanke and Tim Geithner to debauch the US Dollar with the President of the United States having their backs.

How else can you explain Obama not mentioning the US Dollar once during the State of the Union address? Correlation isn’t causality. We get that. But correlations on a 30-day to 3-year basis are extremely high, and so is causality on a 40 year-basis. It was a Republican President (Nixon) who abandoned the Gold Standard in order to debauch the dollar in 1971 and proclaim “we are all Keynesians now.”

Reality 101: In an America where we try to make it ok for losers to win, I’m not going to convince someone that they are accountable for something that is very wrong in this country in 900 words or less. So now I’ll just get on with my day.

I couldn’t make this up if I tried, but Bloomberg’s #1 Economic Headline today is “STOCKS, OIL CLIMB ON GLOBAL ECONOMIC RECOVERY.”

Meanwhile, everything other than Gold, Energy, and Basic Materials stocks (inflation expectations rising), is signaling that Global Growth Slowing here sequentially in February is the case: 

  1. The SP500 is still down -13% from its 2007 peak (tell your broker you need to be up +15% from here to get back to breakeven)
  2. US Treasury Yields (10-year) have dropped back below my intermediate-term TREND line of 2.03%
  3. The Yield Spread (10s minus 2s) is down 3bps day-over-day
  4. Spain, France, and Italy are all making lower-highs in the face or Economic Stagflation
  5. CRB Commodities Index (18 commodities) = +2% for the week vs the SP500 +0.1%
  6. Oil prices are up +3.4-4.8% on the week with the US Dollar down almost 1% (and the Yen is collapsing)

Japanese Yen collapsing? Yes, it’s not headline news, yet – but it will be. The Yen is down, literally, in a straight line to the tune of -6% for the month of February to-date. I think this looks eerily similar to the initial cliff dive of the Euro in April of 2011. Japan, like Europe at this time last year, is about to enter a phase of massive sovereign debt monthly maturities (57.1 TRILLION Yen in March).

Is it going to be different this time? USA and Japan have to rollover $3.0 TRILLION and $3.2 TRILLION in debt (in debauched dollars) in 2012 and oil prices over $100/barrel have never not slowed Global Economic Growth. Or are we hearing Phony Promises about an economic recovery, again, during an election year?

My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, and the SP500 are now $1742-1787, $119.81-124.61, $78.70-79.07, and 1354-1369, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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